Skip to main content

Government's role in ratings agencies' failures overlooked

John Carney on, "The Missing Culprit at the Credit Ratings Hearings":

"While there can be little doubt that the ratings process was not what it should have been, it is hard to understand why the ratings of a venerable company like
Moody’s went so awry without focusing on the role of government regulation. Even more importantly, it’s impossible to understand why the poor performance of ratings agencies led to a financial crisis of such scale and extremity without delving into the role of government.

For decades, the has government all but guaranteed that the ratings process was reserved for a narrow oligopoly of just a few companies—primarily Moody’s and Standard & Poor’s, with Fitch a distant third. The main mechanism for this guarantee is a rule put in place by the SEC in 1975 that declared that brokerages and money market funds have to hold securities rated by a small clique of companies the SEC annointed as Nationally Recognized Statistical Rating Organizations.

Without serious competition, the ratings agencies had little incentive to improve their own performance. Even today, nearly every credit agreement created by a major U.S. financial institution requires a rating from Moody’s or S&P..."

Yep.

Tom Woods makes the very same point about the ratings agencies in his book, Meltdown. How can anyone have expected these firms to hand out timely and accurate assessments of credit risk in (once politically favored) mortgage-backed securities when their own politically protected existence, and profits, hung in the balance?

Popular posts from this blog

Seth Klarman: Margin of Safety (pdf)

Welcome, readers! Signup for free email updates at the Finance Trends Newsletter . Update: PDF links removed due to DMCA notice. Please see our extensive Klarman book notes below. New visitors, please check the Finance Trends home page for all new posts. Here's something for anyone who has been trying to get a look at Seth Klarman's now famous, and out of print, 1991 investment book, Margin of Safety .  My knowledge of value investing is pretty much limited to what I've read in Ben Graham's The Intelligent Investor (the book which originally popularized the investment concept of a "Margin of Safety"), so check out the wisdom from Seth Klarman and other investing greats in our related posts below. You can also go straight to Ronald Redfield's Margin of Safety book notes .    Related posts: 1. Seth Klarman interviews and Margin of Safety notes     2. Seth Klarman: Lessons from 2008 3. Investing Lessons from Sir John Templeton 4.

Slate profiles Victor Niederhoffer

Slate's recent profile of writer/speculator, Vic Niederhoffer has been getting some attention from traders and finance types in recent days. I thought we'd take a look at it here too, to offer up some possible educational value from Vic's experiences with trading and loss. Here's an excerpt from Slate's profile of Victor Niederhoffer : " I've enjoyed getting your e-mails. It sounds like you've thought a lot about being wrong. Well, the reason you contacted me, to call a spade a spade, is that I'm sort of infamous for having made a big, notorious, terrible error not once but twice in my market career. Let's talk about those errors. The first was your investment in the Thai baht, which pretty much wiped you out when the Thai stock market crashed in 1997. I made so many errors there it's pathetic. I made one of my favorite errors: "The mouse with one hole is quickly cornered." That is key. There are certain decisions you make in li

Clean Money - John Rubino: Book review

Clean Money by John Rubino 274 pages. Hoboken, New Jersey John Wiley & Sons. 2009. 1st Edition. The bouyant stock market environment of the past several years is gone, and the financial wreckage of 2008 is still sharp in our minds as a new year starts to unfold. Given the recent across-the-board-declines in global stock markets (and most asset classes) that have left many investors shell-shocked, you might wonder if there is any good reason to consider the merits of a hot new investment theme, such as clean energy. However, we shouldn't be too hasty to write off all future stock investments. After all, the market declines of 2008 may continue into 2009, but they may also leave interesting investment opportunities in their wake. Which brings us to the subject of this review. John Rubino, author and editor of GreenStockInvesting.com , recently released a new book on renewable energy and clean-tech investing entitled, Clean Money: Picking Winners in the Green Tech Boom . In Clean